Hedge Fund Fraud: SEC Partially Overturns Ruling Against Investment Adviser But Raises Amount He Owes & Jury Selection Begins in Former Visium Fund Manager’s Bond Fraud Case

Ex-Visium Fund Manager on Trial for Bond Fraud
Jury selection is scheduled to begin this week in the criminal trial against Stefan Lumiere, an ex-Visium Asset Management LP portfolio manager. Lumiere, who managed the Visium Credit Opportunities Fund, is accused of falsely inflating the value of securities in a fund and committing bond fraud.

Visium Asset Management LP is a New York based-hedge fund. The $8B investment hedge fund shut down in 2016 after a criminal investigation that led to charges against a number of people, including Sanjay Valvani, who  killed himself several months ago following allegations of insider trading.

According to prosecutors, from ’11 to ’13, Lumiere was among a number of people who conspired to bilk investors through the mismarking of securities’ values that were in a fund that invested in healthcare company-issued debt. The prosecution believes that the alleged misconduct caused the net asset value of the fund to be overstated by tens of millions of dollars monthly. Meantime, investors were fooled into thinking the bonds were very liquid even though they were illiquid.

Lumiere pleaded not guilty to securities fraud, conspiracy, and wire fraud charges last year.

SEC Partially Overturns CDO Fraud Ruling But Doubles Fee Owed by Investment Advisor to $6.8M
The SEC has partially reversed an administrative judge’s ruling that found that Wing Chau and his Harding Advisory LLC committed fraud related to investment products tied the collateralized debt obligations the Norma CDO I and the Octans I CDO Ltd.

According to the regulator, Chau and Harding gave the hedge fund Magnetar Capital LLC undisclosed influence over choosing CDO collateral. The Commission accused Magnetar of being involved even though its strategy was about taking short positions in mortgage-backed securities in collateralized debt obligations, including Octans 1. The agency said that Harding and Chau committed fraud when they did a favor to Magnetar and Merrill Lynch (MER) by acquiring Norma bonds, which the latter brokerage firm marketed, and included them in two other collateralized debt obligations that Harding managed. The regulator said that this was unfortunate for investors.

Chau and Harding appealed that decision. Although the SEC dismissed certain claims suggesting that Magnetar had allowed Harding to decide which bonds and how many of them to include. Related to the Norma bonds, however, the SEC found that Chau and Harding did purchase them as a favor to Magnetar and Merrill Lynch, distributing them to two collateralized debt obligations.  They regulator said that he and his firm disregarded the assets’ creditworthiness.
The Commission also recalculated how much Chau and Harding must pay in ill-gotten gains. As a result, Harding and Chau will have to pay $6.8M instead of $3.04M. A lawyer for Chau said that while his client was happy with the modification of the ruling, he would appeal the remainder of the new ruling before an appeals court.

Ex-Visium hedge fund manager to face trial on U.S. fraud charges, Reuters, January 9, 2017

Hedge Fund Portfolio Manager Sanjay Valvani And Former Portfolio Manager Stefan Lumiere Charged In Manhattan Federal Court, Justice.gov, June 15, 2016

SEC Trims ‘Big Short’ Adviser’s Fine, Denies ALJ Challenge, LAW360, January 9, 2017

The SEC Order in the Chau/Harding Case (PDF)